President Trump cut a trade deal with the European Union this week, which gives the President greater leverage to press ahead for a similar deal with China.  That may be a much harder proposition, even though the EU deal will likely prompt Europe to align with Trump in pressuring China to change some of its behavior, particularly with respect to intellectual property, market access and other trade practices that tilt the playing field in Beijing's favor.

China is prepared to play the long game.  Trump has threatened to tariff all $505 billion in Chinese exports to the US if progress is not made on the bilateral trade talks.  The US only exports $130 billion a year to China, and China remains far more dependent on exports to keep the economy humming.  But China has allowed the value of the yuan to decline recently, and it is now nearing the level of 7 yuan to the dollar.  At that point, the reduced costs to US importers of Chinese goods offsets the cost of the tariffs.  China is taking a loss on the slight currency devaluation, but it gives them breathing space.  China has already found alternative sources of soy beans and other imports that are the lifeline of the US farm sector.  The planned $12-19 billion farm bailout doesn't solve that problem–it just keeps Trump's farmer base from suffering serious losses before the November elections.

In the long run, the US has two distinct advantages that offset some of the vulnerabilities in the US economy, brought about by 40 years of outsourcing.  The US is energy independent to a very large extent, where China is greatly dependent on energy imports, largely priced in dollars.  The US has a global military advantage that will persist for the next decade or more.

Hard to say where this will lead.  Best option is for the US and China to resume the trade talks that broke off months ago.  Economic mutually assured destruction is not a pleasant outcome, particularly at a moment when even the IMF is worrying about emerging market debt, corporate debt defaults and other signs of another global financial crisis.

This entry was posted in Uncategorized. Bookmark the permalink.